India’s GDP Growth May be Halted by a Drought

In the second quarter of 2008 India economy expended 6.1%, after growing 5.8% in the first quarter. And although it is less than average recorded during last three years, India is still the second fastest growing economy in the world after China.

Indeed, due to relatively small dependence on exports (only 22% of GDP) and sizable help from the Indian government and the central bank (12% of GDP), the third largest economy in Asia has weathered the global slowdown quite well. In December 2008, the government announced first stimulus package, which included tax cuts, the injection of capital into banks, and allowed overseas investors to double purchases of debt. In July 2009, second measure was brought into light, providing resources to boost domestic demand, with tax cuts, and spending increases on the rural sector and infrastructure. In addition, central bank injected about 5.6 trillion rupees ($115 billion) into the banking system by purchasing government bonds and buying back market stabilization bonds. Moreover, the central bank lowered the reverse repurchase rate by 275 basis points and its repurchase rate by 425 basis points since October 2008.

Yet, the economists and India policymakers are afraid that the recovery may be halted this year by a weaker monsoon. Indeed, though agriculture’s share in India’s GDP has declined to around 16% in the first quarter of 2009, 65% of the population depends on it as their main source of income. And drought or drought-like conditions has been declared in 278 out of 600 districts in India, as rainfall has been 25% below average in this year monsoon season, according to the Farm Ministry.

Anna Fedec,
9/4/2009 1:32:17 PM